updated 03:00 am EST, Wed March 6, 2013

Government still pursuing Apple over alleged fixing of e-book prices

As part of its case against Apple for allegedly conspiring to "falsely inflate" e-book prices, the US Department of Justice has opted not to pursue its plan to demand copies of the notes from Steve Jobs' biographer or testimony from Walter Isaacson himself regarding any remarks Jobs may have made about the arrangements Apple made with publishers in its effort to both set up its own e-book service and fight against the predatory pricing of Amazon, which had a near-monopoly on e-books and was driving rivals out of business.

It is the latter strategy that the government believes was in violation of the law, though the DOJ has been strangely untroubled by Amazon's tactics of threatening publishers that dared to buck its loss-leader pricing -- which both starved smaller publishers of income and raised the barrier to prevent the entry of competing e-book services. The DOJ originally said that it had issues with Apple's adoption of the so-called "agency model" for pricing in its agreements with publishers, but has since focused mostly on statements made by Jobs and others during publisher negotiations that Amazon's monopoly on e-books was harmful to the market and publishers overall.

A specific part of the agreements Apple struck with the publishers was a "most-favored-nation" clause. Publishers were allowed to set their own prices for e-books, with Apple (or other companies) taking a "reseller" percentage just as brick-and-mortar bookstores do. But under the contract with Apple, they could not sell the e-books for less with any other retailer (including Amazon), meaning that the agreements would have the effect of equalizing pricing between Amazon and all other sellers, removing Amazon's ability to engage the predatory pricing practice that publishers hated.

The government has viewed the arrangement as harmful to consumers, since publishers would naturally choose to price books in order to make some profit rather than lose money as they did under Amazon's "wholesale" model, and thus average e-book prices would rise somewhat. What the DOJ sees as conspiracy to raise prices, Apple has argued was in fact the only sustainable model that kept smaller publishers in business, thus preserving consumer choice and preventing Amazon from continuing to abuse its monopoly status.

Both the federal government and numerous states originally charged Apple and a number of publishers with price-fixing and accused Apple of colluding with the publishers to set prices, a charge that has faded into the background as all of the publishing houses, despite protesting innocence, eventually capitulated to settlements with the government and states. Apple now is the sole defendant in the case, and has lambasted the DOJ as fundamentally misguided in its legal responses.

Originally, lawyers in the case wanted written notes from Isaacson's numerous interviews with Jobs, hoping to find more detail on Apple's thinking on the publisher arrangements. Jobs had written an email to publishers pointing out some of the flaws in Amazon's model and encouraging them to join Apple in promoting "agency model" pricing for all players in the industry, the model the publishing industry had traditionally used with brick-and-mortar stores.

Isaacson had declined to provide the DOJ with such material, citing a journalistic shield law. DOJ lawyers had argued that Isaacson was not protected under that law, but have given up pursuing the matter anyway. It's possible that the DOJ judged the effort to fight Isaacson not worth it, or perhaps saw that its claims with regards to Jobs lacked sufficient merit. It's also possible that the government wanted to avoid any possible exculpatory evidence they might find in the material.

Interestingly, Apple agreed to settle similar charges in Europe by agreeing with publishers on a settlement not unlike the one it is fighting the DOJ over. In Europe, the agreement by all parties to abandon the "agency model" and adopt a "wholesale" pricing scheme that allows loss-leader pricing is only in effect for two to five years, after which the publishers may opt to return to their previous arrangement. Why Apple wouldn't agree to a similar settlement with the DOJ remains unclear, but since Apple's publishers were forced by the DOJ agreement to "tear up" their contracts with Apple and revert to wholesale pricing, Amazon has again increased its strength back up to monopoly levels through its discounting practices.

Amazon's share of the market had lowered from 90 percent to less than 60 percent during the time Apple's agreements had used the "agency" model, and allowed companies like Barnes & Noble and Sony (among others) to enter the competition. Apple has since decided to turn the tables on Amazon and has begun discounting e-books, keeping the company from taking returning to a monopoly position.

Amazon still accounts for about half of all e-books sold, with other sellers apart from Apple able to gain a significant foothold due to the discounting of the two leaders. Amazon has also been sued by a coalition of smaller and independent booksellers, who say its predatory pricing practices are preventing them from entering the e-book market -- exactly as Apple predicted.